RBC, BMO warn on housing

Posted on January 10, 2012 by Dale McGauran

Two of Canada’s biggest banks are expressing caution over the Canadian housing market in the year ahead, particularly in Vancouver and Toronto.

The heads of Royal Bank of Canada (RY-T52.640.400.77%) and Bank of Montreal (BMO-T58.250.310.54%) told an investor conference in Toronto Tuesday morning that a softer housing market is a concern across the country, with particular focus on the condo markets in Toronto and Vancouver, where capacity is significantly overbuilt.

“When you look at markets like Vancouver and Toronto, there is a level of caution from a risk perspective that is higher today than it would have been a few years ago,” Royal Bank of Canada chief executive officer Gordon Nixon told the gathering of financial analysts hosted by RBC.

Mr. Nixon, head of Canada’s largest bank, was speaking specifically of the condo markets in two of Canada’s biggest cities, but said the bank has concerns about a softening housing market in general. His concerns were echoed by Bank of Montreal CEO Bill Downe, the head of Canada’s fourth-largest bank, who said a slump in the Canadian real estate market is looking more likely.

“I wouldn’t give up on the Canadian housing market, but there has to be a soft landing – there has to be a landing.” Mr. Downe said.

Mr. Nixon said RBC has conducted stress tests on its books for a decline in housing prices of as much as 25 per cent. Though the bank doesn’t figure that dire situation will happen, RBC is comfortable its lending operations could withstand such a large hit if it were to occur. RBC’s exposure to the Canadian condo development market is about $2-billion, Mr. Nixon said.

“We feel very comfortable that we can manage through a significant downturn,” Mr. Nixon told analysts. “But again there would be ancillary impact,” he added, suggesting the bigger concern would be a downturn in the broader economy, in terms of housing demand and growth.

At BMO, Mr. Downe said his bank’s exposure to the condo market is lower than RBC’s, but did not give a specific figure. Though the concerns of both banks are not limited to only condominium construction in Vancouver and Toronto, that is where the market is most exposed to a drop in prices due to rapid expansion in the past decade, the CEOs said.

“There’s no question that the warning signs around the Canadian housing market have been visible for more than a year,” Mr. Downe said. “And I think that particularly with respect to two markets, Toronto and Vancouver, investor-owned condo properties have got to be a cause for concern, just because of supply and demand.”

Despite expectations of a slowing real estate market in Canada, Mr. Nixon said he isn’t worried of a drastic collapse in prices like the one seen in the United States in recent years.

“Notwithstanding the fact that yet there is a concern about consumer credit levels [in Canada], I think it’s also very important to constantly reiterate the structural differences between markets in Canada and markets in the places like the United States,” Mr. Nixon said.

“When you look at the overall Canadian bank lending levels, when you look at the presales when you look at the customers that we’re dealing with, we feel pretty comfortable that, notwithstanding there’s vulnerability, we can manage through it.”

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